The ETUC welcomes the conclusions of the October 2012 European Council on a European Banking Union as an important building block towards enhanced structures of European economic governance and deeper integration of the euro area. The banking union must enable European economic policy to break the negative feedback loop between the debt of sovereign states and their banks’ balance sheets, in which private debt and public austerity have been mutually re-enforcing each other since almost three years. Its main objective must be to regain the primacy of policy over financial markets by creating solutions that would help to reduce the unsustainably high interest rate spreads that have rattled the countries in the periphery of Europe. The EU must urgently re-establish a level playing field for all of its members, preserve the single market for financial services and provide greater stability in the European Monetary Union (EMU).

The ETUC believes that for a banking union to achieve its objectives, a number of important issues must be addressed by the European legislation process ahead. In particular, these concern the architecture of the role of the ECB in the planned Single Supervisory Mechanism, its relationship with the European Banking Authority (EBA), access to ESM rescue funds for troubled banks, deposit guarantee schemes, and a banking resolution framework and fund.

Moreover, the ETUC is convinced that a European banking union can become fully functional only if and when issues related to the structure of the banking system and to the moral hazard herein are tackled simultaneously. A single supervisor and a resolution authority must be accompanied by a structural reform of banks, which should limit the ability of commercial banks to engage in certain kinds of investment banking activities. In addition, the ETUC demands that investment banks’ ability to leverage should be limited to their own funds, which in turn would limit the systemic risk for citizens. Moreover, banks must be prohibited from engaging in any kind of shadow banking activities. The ETUC recalls that the banking sector in Europe is heterogeneous and that many regional, cooperative and savings banks are serving the real economy at best by taking deposits, providing loans and ensuring the transfer of payments.

The ETUC therefore welcomes the thorough analysis made by the High-Level Expert Group on Reforming the Structure of the EU Banking Sector, chaired by Erkki Liikanen (HLEG or Liikanen Report), that robust structural reform of the banking sector would boost stability and growth in the EU. The report’s diagnosis must now be translated into a comprehensive EU policy on banking reform that eliminates the flagrant distortions and delivers an efficient and stable banking system in the interest of the real economy, for enterprises and households alike.

The role of SSM and ECB

The ETUC welcomes the new role for the ECB which lies in the ultimate responsibility in SSM for specific supervisory tasks related to the financial stability of all banks in the euro zone, though national supervisors will continue to play an important role in day-to-day supervision and in preparing and implementing ECB-SSM decisions. For the ETUC, the proposals rightly gear to the effective disappearance of the distinction between home and host operating in the euro zone, since the ECB will have direct oversight of all 6000 euro zone banks, to enforce prudential rules and perform effective oversight of cross border banking operations into the euro zone. The ETUC believes though that it is impossible to supervise all 6000 banks, including very small local savings banks, with one single institution. In practice, the SSM will heavily depend on the cooperation with national supervisory authorities.

The ETUC supports the provisions in the draft Council Regulation that accord the ECB the right to authorize a bank, to withdraw the banking license, to remove the management of banks, to request any information on banking operations, to undertake on-site inspections and to impose sanctions. Supervision will be based on the common rules for capital requirements as set out in the two pieces of legislation that implement the Basel III agreements at EU level, the Capital Requirements Directive (CRD IV) and the related Regulation (CRR), both of which are currently negotiated between the Council, the EP and the Commission.

Financial supervision is linked to the exercise of sovereign power. This is why the ETUC believes that supervisory powers need to be properly defined as well as to become subject to judicial review and appropriate accountability. Inadequate or wrong actions by the supervisor cause the liability on the part of the State. Establishing a single pan-European supervisor is linked to the transfer of sovereign powers to the EU level with potential liability for the Member States involved. In the case of the SSM, decision making is shifted to the EU however the accountability still rests locally as the national governments retain responsibility for resolution and deposit insurance, which the ETUC believes is not an optimal outcome.

The ETUC warns against conflicts of interest that can arise between the mandates and objectives of monetary policy and those of financial supervision, e.g. when one side has an interest in keeping the banking system afloat so as to avoid losses to the ECB balance sheet to incur, while the other side is about to resolve a bank after a red alert. Becoming the single supervisor would give the institution an enormous concentration of powers, since it would be in charge of three important and related areas: monetary policy, banking supervision and – via its key role in the European Systemic Risk Board (ESRB) – macro-prudential supervision. This could lead to a situation where the ECB is controlling the impact of its own actions which is unacceptable for the ETUC. Additionally the ETUC warns against the loss of reputation if the ECB fails as a supervisor it will influence the credibility of its monetary policy.

The ETUC demands therefore firewalls to be built in to ensure the separation of the ECB’s supervision tasks from its monetary policy tasks. Members of the SSM Supervisory Board must include others than those of the Governing Council appointed by the Executive Board of ECB. The ETUC believes that banking supervision is an essential element of democratic control and that the EP must be given a role in the selection process to include experts of civil society.

The ETUC regards it as perfectly legitimate for the ECB as creditor of the banks to have a close look into the books of its borrowers; however the supervision itself must become more transparent. The ECB in its role as a single supervisor must become fully accountable to the European Parliament. A special Committee of the EP would need to be set up to execute a controlling function over the ECB-SSM.

ECB-SSM and EBA, EU-27/17

Two years ago, the EU adopted a number of Regulations on the European System of Financial Supervision (ESFS), establishing European Supervisory Authorities, including the European Banking Authority EBA, which came into force on 1 January 2011. The ETUC contributed to the legislation process in submitting amendments to the draft regulations to the European Parliament. At that time, the ETUC criticised the national prerogatives in the new system of financial market supervision and proved right. The future SSM appears better suited to fulfil an effective cross-border supervision of the banking system than the EBA, which suffers both from financial restrictions depending on staff and budget allocation by the Commission and from the willingness of national banking supervisors to cooperate.

The modification of the existing Regulation 1093/2010 on the establishment of the European Banking Authority stipulates that EBA will remain as a common banking regulator to develop a single rule book and a single supervisory handbook to preserve the integrity of the single market and ensure coherence in banking supervision for all 27 EU countries. The ETUC demands that EBA must ensure the consistency of its interpretation and implementation inside and outside the European Union.

The ECB is recognized as a “competent authority” (in addition to the national supervisory authorities) for the purpose of the supervisory function. However the ETUC warns against a situation that may arise when the EBA will be unable to impose binding decisions on the ECB, while it could force sovereign states to comply when it mediates in a dispute. The Commission argues that, in the rare event of the ECB failing to comply voluntarily, banks would be bound to comply with EBA decisions. Additionally, EBA decisions concerning regulatory matters (binding technical standards, guidelines and recommendations, decisions to reconsider restrictions on financial activities) and budgetary matters will continue to be taken by the EBA Board by qualified majority of its members. Voting on action in emergency situations will also remain unchanged (taken by simple majority). Notwithstanding these safeguards, the ECB-SSM will come to exercise a very powerful, possibly dominant, role in EBA policy-making.

The ETUC believes that close cooperation between SSM and EBA is insufficient to provide equal treatment between euro area countries and those outside. The ETUC believes that supervision of banks should follow the same rules and be of the same quality everywhere in the Single Market. The ETUC is convinced that the objectives of maintaining financial stability in an interconnected financial market and of preserving the single market for financial services require that the geographic scope for an EU supervisory mechanism be the entire EU-27. However the ETUC regrets the reluctance of several Member States to cede sovereign powers in the area of banking supervision, which means that the new regime will not encompass the EU-27, but most likely a sub-group of 17, and lead to a two speed Europe in an essential area of the Single Market.

To safeguard the interests of all EU-27 states, the ETUC believes that the voting powers within EBA must be adjusted to prevent EMU countries to overrule those outside. The EBA powers when dealing with matters affecting all EU member states will be strengthened and the voting regime changed, making it more difficult for individual member states to vote against decisions. The impact of the SSM on the operational functioning of ESFS will be examined in the forthcoming review on the functioning of all European Supervisory Authorities to be presented by the Commission at the beginning of 2016.

Recapitalization by and direct access to liquidity of ESM for troubled banks

The euro zone summit in June agreed to let the ESFS/ESM rescue funds be paid to Spanish banks directly instead of via the government, thereby sheltering the weakened sovereign from taking over ever more bad loans and private debt held by the banks, and paved the way for ECB supervision. Against the interpretation of some, the Commission proposals of 12 September and the European Council conclusions of 18-19 October have made the adoption of SSM a prerequisite to enable a direct recapitalization of banks by the ESM. The ETUC is urging the European institutions not to delay the necessary decision making to establish the SSM and make it fully operational as soon as possible in 2013.

The ETUC firmly rejects the view of certain governments who have insisted that the ESM may only deal with troubled banks in the future and should abstain from ‘legacy debt’ of banks that have existed prior to the enactment of the ESM. Creating a level playing field requires that all banks that are still fundamentally solvent should have access to the ESM. Insolvent ‘zombie’ banks however should no longer be let alive artificially. Their resolution must be enacted swiftly, and financed by banks’ own resolution funds and shareholder bail-ins. Their recapitalization through European funds should be excluded.

While the ESM can buy government bonds in the primary markets of those governments which have already sought its assistance and are, therefore, following the related harsh social conditionality, a direct intervention by the ESM to recapitalize banks could potentially avoid these hardships. However the ETUC demands that any recapitalization of private banks through public money must in turn lead to a transfer of proportional entitlements to ownership.

The ETUC believes that the introduction of SSM would directly address the core of the current crisis in two ways. By enabling the ESM to rescue troubled banks, governments of their home countries would no longer be coerced to take on ever more private banks’ debt and thus be in a position to avoid the most brutal forms of budget austerity. As an indirect effect, this could ease the borrowing of governments on financial markets by pushing interest rates down and would be more effective than the ECB’s current interventions in the secondary markets. Secondly, the SSM could withdraw banking licenses and start to resolve financial institutions that are in fact zombie banks because technically insolvent, but still alive.

The ETUC demands a strong SSM that works against the prevailing sentiment of uncertainty in the bond markets that has pushed up interest rates to unsustainable highs for some, while bringing down refinancing costs for others, adding to the already existing macro-economic imbalances. It is also hoped that a sweeping banking supervisory authority will help change the most harmful practices in the sector, such as strong incentives for traders and top management to take excessive risks and to exert pressure on bank employees to sell products to their customers who are hardly in their interest. The ETUC therefore welcomes the proposals from the Commission as a step in the right direction that could achieve good corporate governance, high quality customer services and enhance working conditions in the sector. Bank employees must be fully involved in this and consulted with prior to any steps that are being taken.

Completing banking union

While the above sets out the necessary requirements of a functioning banking union, the ETUC believes that they are far from being sufficient. For the ‘imperative to break the vicious circle between banks and sovereigns’ (Euro Zone Summit Conclusions of 28 June 2012), deposit guarantee schemes and banking resolution frameworks must be put in place without further delay. These would set up the common instruments that are required for a true crisis management in EMU to function.

It is imperative for the ETUC that the blockage by the Council of negotiations on the Directive on Deposit Guarantee Schemes [recast] be lifted and the legislative procedure completed so that the Directive can be applied by each member state. Uniform, common and stringent requirements for all national deposit guarantee schemes must ensure that bank-runs are avoided and customers re-ensured that their money is safe. The Council must ensure that the amount of insured deposits for each individual is raised from 50.000 to 100.000 euro, and higher amounts be guaranteed in particular cases such as insurance redemption, inheritance or real estate sales. In addition, all banks should be obliged to provide for a security fund of 1.5% of the total amount of their deposits. National systems which function as institutional guarantee systems should not be negatively affected by a European standardisation of deposit guarantee systems

The Directive on bank resolution and recovery adopted by the Commission on 6 June 2012 should be adopted as soon as possible to open up the creation of a single European recovery and resolution regime over the medium term which is essential within the banking union. Mechanisms of full protection of savings and tools of resolution and recovery that exist in certain banking sectors (e.g. in savings banks and mutual banks) should be recognized as constituting efficient safeguards against costly bank bail-outs by the taxpayers. Nevertheless, the ETUC demands the banking union to be underpinned by a fiscal backstop that is sufficient to restore confidence in the financial system.

For the banking union to become an important building block towards a resilient EU banking sector, many problems need to be resolved in the structure of the banking system. The most important would seem to make the construction of a banking union conditional on the resolution of the universal banking model of ‘Too big to fail’ banks. The recommendations of the High Level Group of Experts chaired by the President of the Finish Central Bank, Erkki Liikanen, must be followed-up by the Commission and be used for broad-based consultations with the social partners and civil society at large on the future of the European banking system.

The ETUC demands that these subsequently lead to EU legislation that addresses moral hazard at the European level and the implications on taxpayers’ money and distortion of activity and competition by “Too big to fail” banks. Fighting the creation of asset bubbles and the fact that many banks in Europe are above optimal size and seem “beyond resolvability” is tantamount to the political acceptability of the Single Market for financial services and cross-border bank bail-outs. The ETUC calls on the Commission to present legislative proposals in due course and to resist pressure from the banking sector to water down the proposals of the Liikanen Group.